How Annuities Help Long-Term Care Planning

A person facing the prospect of long-term care with moderate income and assets may eventually have to rely on Medicaid to pay part or all of the cost of care.  Federal disaster relief, crop protection, Medicare services, aging services and programs for low income individuals do not require families to hand over their assets after the recipient dies.

Or what if people live in a flood zone but can’t afford flood insurance. If rising waters from a hurricane completely destroy their property and the federal government helps them rebuild that property, the government is not going to confiscate the home after they die.

If people fail to insure for long-term care and Medicaid pays for that care, why does the government have the right to confiscate their property?

There’s a good chance you or you spouse will end up in a nursing home. The cost of such long term care varies across the U.S., but $70,000 per year is a reasonable estimate. Paying that can obliterate the assets of a middle income American retiree in just a few years.  Medicaid will pay for nursing home costs; but it does so only for those who are impoverished.

When you apply for Medicaid help, it ‘counts’ your assets to determine if you qualify for free assistance. If not, it’ll charge you annual costs appropriate to your state that you must pay from your assets until you’ve spent down your money to your state’s threshold asset level.

You can’t simply transfer your assets to someone else to impoverish yourself before applying for Medicaid. Medicaid will attribute whatever you transferred as a countable asset -unless you transferred it some 5 years – called the look-back period – before applying for help.

Medicaid planning refers to arranging or transferring your assets to prevent or to minimize their use by Medicaid if pay for your long term care. This article explains how you can shelter some of your assets with an annuity while you or your spouse have Medicaid pay for your long term care costs.

Below are a few of the strategies used to protect income and assets. Since Medicaid rules vary from state to state, you need to talk to a qualified planner or elder law attorney in your state to see the range of planning tools that can be used for your particular situation.

Since Medicaid is a combined state and federal program, each state defines how little your assets must be before Medicaid will pickup your nursing home costs. Typical asset threshold levels are about $2,000 to $3,000.

In the case of a married couple, when one spouse claims Medicaid assistance for his long term care, the state can consider the couple’s assets for first paying for Medicaid’s assistance. Rules allow the healthy spouse some percentage of the couple’s assets to live on. But Medicaid will claim any amount in excess of this for payment of the other spouse’s long term care costs. An exception to the assets that can be claimed by Medicaid is any income stream the healthy spouse receives.

This technique relies on two Medicaid rules. The first rule is that income between couples is attributed to the spouse who owns the income. Unlike assets which have to be shared for Medicaid eligibility, income does not have to be shared. For example if the Medicaid recipient has a total income of $500 a month and the community spouse has a total income of $4000 a month the community spouse is not required to contribute any income towards the care of his or her spouse. Medicaid will cover the bill less the $500 a month, which less a monthly allowance must be spent towards the cost of care.

The second rule allows a spouse to transfer any amount of assets to another spouse without penalty of losing Medicaid eligibility.

So, by buying an immediate annuity with any excess ‘countable’ assets you have converts them into an income stream – which makes them a non-countable asset. Doing so also avoids the 5 year look-back period requirement, too.

To use an annuity to side step Medicaid claims, it has to fulfill these requirements:

* it must be irrevocable

* it cannot cover a term longer than the purchaser’s life expectancy and the payments expected during the annuitant’s life expectancy must at least equal the cost of the annuity,

* its payments must begin immediately, so a deferred annuity is excluded, and

* unless there is a spouse, a minor, or disabled child, the state must be named as the remainder beneficiary up to the amount of Medicaid provided

Lastly, the healthy spouse must name the state as the remainder beneficiary for costs incurred by the Medicaid recipient as well as herself if she ever receives Medicaid. (This provision would only come into effect if that spouse were to die before the guaranteed payments under the annuity had expired).

Medicaid planning requires competent legal guidance to keep your planning abreast of current laws. If you’re interested in using an annuity, be sure you acquire one whose provisions will avoid Medicaid’s claims.